Digital money: Dwolla’s smart phone app shows an index of financial options (left) and prompts a user to fund the electronic account (right) either by transferring money from a bank account or borrowing it from Dwolla.

No payment system is useful unless it’s widely accepted. Compared with Amex, which has 50 million cards in circulation, Dwolla still has limited reach. The company says 80,000 people have signed up, and many use the service for personal transactions, like fund-raising from friends online. About 8,000 merchants also accept Dwolla, although the number outside the company’s home turf around Iowa is limited.

Dwolla plans to expand its network by courting other software companies. For example, Shopify, a company that sells software for online stores, recently began offering Dwolla as a payment option. Milne says if a company like Apple began using his network—say, for 99-cent purchases on iTunes—it could similarly avoid card fees.

“We’re evolving into a new payment behavior, which is based on your cell phone,” Milne says. “No one knows what kind of predominant behavior it’s going to be. For us, the goal is to build the ubiquitous platform that everyone can use.”

One problem that has dogged Dwolla is that loading money—by wiring it from a bank account—takes several days. That’s far from the instant satisfaction suggested by the term “digital cash.” In December, Dwolla took a step toward solving the problem by announcing that it would advance its customers up to $500 on demand if they paid it back within a month (a $3 fee applies).

Dwolla is working on a deeper fix to the problem—something Milne calls the company’s “real innovation.” Today, banks transfer money over ACH, an almost 40-year-old system that is run by the U.S. Federal Reserve and one private company. ACH is what makes it possible to deposit paychecks and pay utility bills electronically. The transfers are done in batches, which is why they often take three or four days.

Dwolla needs those transfers to go faster. Working with 16 institutions, mostly corn-belt credit unions, the company has deployed software it calls FiSync that it says will let ACH transfers go through nearly instantly using Web-based software. Recently, Milne has been pitching the idea to bigger banks as well. “If you get the banks, you become an unavoidable part of the stack. You become the Internet connection,” he says.

Dwolla’s ideas face skepticism. Marianne Crowe, a vice president at the Federal Reserve Bank of Boston, is doubtful that a startup with little experience in payments can improve on the network. “You are kind of duplicating what exists in the larger-scale banking structure,” she says. “I don’t think they necessarily understand what’s involved.” Milne says other Federal Reserve officials have visited Dwolla’s offices and are watching its progress.

For now, Dwolla employees are the darlings of Des Moines. This February, state officials sent over cookies after Dwolla raised $5 million in a funding round led by New York’s Union Square Ventures, also an early investor in the sites Twitter and Etsy.

Albert Wenger, a partner at Union Square who says he’s impressed by Milne’s fiercely independent views, uses Dwolla as a convenient way to pay tutors for his children. But is the firm using Dwolla’s payment network to relay any of the investment?

Perplexed for just a second, Wenger replied to the question: “That could have been a good idea.”